Mutual funds are ideal for creating a financially sound investment portfolio. A well-constructed mutual fund portfolio can help you achieve your financial goals. However, mutual funds are not perfect. You must be mindful of a few errors before you opt for a mutual fund investment. These errors can adversely impact your investment portfolio. Avoid the following mistakes when you invest in a mutual fund:
- Fund allocation without objective:
Mutual fund variants come with different objectives. Therefore, it is essential to outline your financial goals clearly before investingina mutual fund scheme. Well-defined financial goals will help in determining the investment amount and horizon. It will also help you select the mutual fund variant. Use the online SIP calculator to identify the required investment amount for the SIP investment mode.
- Not researching the market:
Thoroughly research the market condition before signing up for a mutual fund scheme. You must know the fund type, expense ratio, asset size, exit load and other details. Have a fair idea about your risk appetite before signing up for a mutual fund scheme. Sign up for the mutual fund scheme if the market is performing well and your risk tolerance aligns with it.
- Unrealistic expectations for returns:
It is good to have an investment goal in your mind before signing up for a mutual fund scheme. However, having unrealistic expectations about the returns on a mutual fund investment is also a mistake. The returns in mutual funds are market-linked. Be aware of the market fluctuations and stay invested during a bear market for long-term wealth accumulation.
- Not diversifying the portfolio:
People usually commit another major misstep while investing in mutual funds. They allocate their funds to a single mutual fund, which exposes their mutual fund portfolio to risks because market performance is unpredictable. Fund diversification is vital if you are keen to enjoy satisfactory returns on mutual fund investments. Diversification will help in mitigating your risks.
- Not having an emergency fund:
You can depend on an emergency fund to meet unexpected and unplanned expenditures. Your savings are built gradually in this type of fund. Deposit a specific amount in a separate bank account every month. Regularly doing this might help you acquire a considerable amount.
- Over-diversifying your funds:
Spreading investments is crucial because it mitigates the overall risk. However, that does not mean that your investment portfolio should be over-diversified. Buying numerous funds to reduce risks may also hide the underperforming funds in your portfolio.
- Not having an investment horizon:
Identifying the investment horizon will also help you identify a suitable mutual fund variant. For example, you invest in the equity market. In that case, you must invest for a longer time. Early redemption of equity investments early will incur losses.
- Not monitoring the portfolio:
Monitor your mutual fund portfolio regularly to ensure you reach your financial goals. Periodic evaluation makes sure that your portfolio does not consist of underperforming funds.
- Taking impulsive investment decisions:
Avoid taking a mutual fund investment decision based on someone else’s advice or without completely understanding the fund. You must also avoid redeeming investments in case of a market crash. Stay relaxed during market corrections and regularly observe the fund performance for some time before making any decision.
- Not identifying risk tolerance:
Mutual funds, like other investment options, involve risks. Hence, it is imperative to evaluate your risk appetite first. Understanding the risks associated with different variants helps in analysing your risk tolerance. Identifying your risk appetite will enable you to choose the most suitable investment option.
You will continue to commit mistakes throughout your investment journey if you don’t have adequate knowledge of your mutual fund investment. Understanding the common mistakes might help you take better decisions during your investment journey.